Cash Flow is the lifeblood of any business. Without a strong cash flow, planning for the future can be difficult, if not impossible. However, it’s also important for businesses to recognise that some cash flow challenges can be forecasted, and vary by industry. Consumer trends, payment cycles and the nature of supply and demand are all factors that affect how a business will perform in the future.
More than 50% of small businesses fail within three years of trading, so understanding how to stay resilient during cash flow shortages can help a business overcome those vital early years.
Every industry faces different challenges, so the time of year when businesses face cash flow problems can vary wildly by sector. Here’s what business owners need to know to help protect their revenue in hard times:
When do different industries experience cash flow problems?
Manufacturing
Manufacturers experience cash flow shortages during both the summer months and early in the year. Often impacted by a lower volume of orders in summer months while their customers go on holiday, summer can be a difficult time for manufacturers to determine exactly how much product they need to produce to meet the necessary drop in demand.
January and February are also difficult months for manufacturers, as end-of-year budget freezes clamp down on the sector.
Retail
January to March are problematic months for retailers. Often ending the calendar year with strong sales, the early-year slump can hit unprepared businesses hard.
A combination of consumers tightening their purse strings after the Christmas splurge and British winter biting hard can leave retailers with significantly fewer sales than at the end of the year. Brick-and-mortar retailers are hit particularly hard as lower footfall leads to quiet streets and difficult trading conditions.
Construction
As ever, the weather is the enemy of construction. Cold, wet weather brings a halt to many construction projects and brings new challenges to those that continue through the winter.
Seasonal delays also mean postponed client payments, creating a cash flow crunch during these months. Many construction firms seek to secure bridging loans during these periods - a short-term solution to cash flow challenges until longer-term funding can be secured.
Professional Services
Professional service businesses, such as accountancy, law or consulting firms experience peaks and troughs in demand throughout the year. Demand fluctuates around tax season, end-of-year audits, or summer holidays, creating uneven cash flow. Some clients delay payments around the end of the year due to budget constraints, leaving unprepared businesses high and dry with many outstanding invoices.
To remedy this, many such firms have turned to retainers to ensure that revenue continues to trickle in even in months with relatively little activity for clients. If this isn’t an option, some incentivise early payment with a discounted rate.
If clients are still refusing to pay, invoice financing helps use outstanding invoices as security against a loan. These quick-access loans can be set up at speed in case of emergencies and can help businesses bridge the gap between late payments.
When other industries experience cash flow shortages
Cash flow management strategies for businesses
While the challenges faced by every industry can vary wildly, there are some strategies that any business can implement to shield against a future cash flow crisis.
Build a cash reserve
A robust cash reserve acts as a safety net when cash flow becomes an issue. Saving a portion of the profits during peak periods can help plug the gap in tougher times. This shields the business against disruptive measures like cost-cutting or having to apply for high-interest loans. Remember, a cash flow crisis can occur at any time, so it’s important to ensure that your cash reserve is easily accessible at any time.
Shorten your payment cycles
If you really want to keep on top of your cash flow, shorter payment cycles can make a big difference. While having a big invoice paid to you is a great feeling, having to wait longer for that big payoff is risky. Splitting the bill into smaller, more regularly scheduled payments is a more risk-free approach to billing.
Businesses can also offer incentives such as early payment discounts to encourage clients to pay ahead of schedule, meaning clients benefit from this strategy too.
Secure external financing
Business finance is an incredibly powerful tool, providing a financial cushion for businesses in hard times. While bridging loans can help protect against short-term cash flow strains, invoice factoring can provide peace of mind against clients who pay late.
Cash flow problems can really hamper the growth of a business too, so products such as asset finance can give a business the tools it needs to trade effectively, avoiding expensive up-front costs in exchange for smaller longer-term payment plans.
Plan and forecast
It’s never too early to plan for the future. The best time was yesterday, but the second-best time is right now.
Being able to anticipate financial peaks and troughs before they happen means you can prepare to face them head-on. A detailed forecast can also gain favourable rates for business loans and give a business the upper hand in any future negotiating.
Safeguard your relationships
Positive relationships encourage clients to pay on time and provide opportunities for open discussions about payment terms. Asking clients to pay can be uncomfortable, but it’s significantly easier if you have a good relationship with the client.
Regular communication and a personalised service that makes the client feel valued go a long way in this regard.
Getting a business off the ground is incredibly challenging, and cash flow struggles can quickly stifle any chance of future growth. Fortunately, there is help available. To learn more about business finance and the options available to you, visit www.approvedbusinessfinance.co.uk/business-finance.